ESG+ Newsletter – 20 June 2024

From restoration to green claims, it can be hard to keep up with the EU legislative agenda, but we cover both this week for readers. We also look at polling data in the US through an ESG lens, the interaction between pensioners and AI and ask whether EU commercial properties are the latest potentially ‘stranded’ asset class. Finally, we look at early trends from the US proxy season, with a particular focus on voting outcomes on ESG-related proposals.

EU Nature Restoration Law is approved 

This newsletter has covered the tumultuous journey that the EU Nature Restoration Law has taken to receive approval. Given the number of countries voicing opposition, many anticipated that the law would struggle to get the votes required for final approval. In a further twist to the tale though, the law was endorsed on Monday, setting the regulatory demand that EU member states restore 20% of its degraded land and sea ecosystems by 2030 and all ecosystems by 2050. The most recent turn of events was caused by Austrian Climate Minister, Leonore Gewessler, going against her country’s conservative coalition to vote in favour of the law. While this move may cause domestic challenges, the vote was binding and the law was passed. The law has seen fierce opposition, in particular from farming groups who view the law as overly bureaucratic and restrictive. Whether the law will face legal challenges in certain European countries remains to be seen but, importantly, its passing ensures the EU arrives at the upcoming biodiversity COP in a leading position, which will be crucial if the conference is to achieve its aims to halt and reverse the biodiversity crisis.   

University polling shows US voters generally supportive of climate action

Against the backdrop of upcoming elections, climate change and the responsibility of governing bodies to intervene have been under focus. According to a survey of 900 adults, conducted by programmes from Yale and George Mason, voters broadly agree that addressing global warming and facilitating the transaction to clean energy should be prioritised by the President and Congress, as well as corporations, political parties, other government bodies, and individuals. Unsurprisingly, for Democrats, global warming and environmental protection rank among the top five issues, while for moderates or conservatives, these issues are lower, yet remain a top ten priority, indicating a level of bipartisan support for addressing these issues. Specifically, voters express support for policies aimed at reducing carbon emissions, climate justice initiatives, and corporate transparency; notably, 79% of voters believe public companies should disclose their carbon emissions, relevant data against the recent SEC action. While there remains significant complexity in evaluating the wants and needs of voters, there appears at very least a recognition of a changing climate – how best to act on that may well differ wildly though, depending on who you ask. 

Growing risk of stranded assets across EU commercial real estate

Concerns are mounting for commercial real estate asset managers across Europe that their assets will lose value due to the stricter green building requirements. A Bloomberg article highlights a study published by Deepki which revealed that over 50% of c. 250 European commercial real estate portfolio managers – managing over €226 billion of assets – believe that 30% of their assets are currently stranded. What may be more alarming is that this appears nowhere near the bottom, with half of the managers surveyed also indicating that a further 20-40% of their portfolios are at risk of becoming stranded assets over the next three years. The problem facing older commercial property assets is that they struggle to attract tenants due to their weaker ESG credentials, resulting in them losing value and laying vacant. In response, asset managers must consider investing to upgrade these assets to improve their sustainability performance and to make them more attractive for occupiers, with increasing focus on capital expenditure at asset owners, where most capital expenditure budgets in recent years have shifted to incorporate building upgrades and increased energy efficiency.

ESG-related shareholder proposals seem to be regaining momentum 

Early analysis of the 2024 US proxy season shows that support for ESG proposals has stabilised, according to data from the Sustainable Investment Institute (Si2), as noted in a recent Responsible Investor article. The uptick in support is echoed in recent analysis from ISS Stoxx, which notes the reversing of trends of declining support since 2021. Interestingly, Si2’s analysis highlights the differing levels of support for ESG-related proposals between the Trump and Biden presidencies, indicting the impact of the politicisation of ESG has had on voting. While support for ESG proposals grew during the Trump administration, fewer proposals made it past the SEC’s “no action” process; under Biden, support peaked in 2021 but faced greater backlash, putting pressure on US-based asset managers and their voting on such proposals. Proposals deemed “Anti-ESG” have seen even lower support this year, with average support at 2%, down from the 3.5% average support in 2022. 

Meanwhile, governance and remuneration-related shareholder proposals seem to be “re-gaining investors’ attention”, with an increase in the number and support levels for such proposals according to ISS Stoxx’s data. Despite the “noise” around shareholder action on ESG issues, the sustained levels of support for such proposals appear to reflect investors continued demands for greater disclosure and action from companies, with growing regulatory demands globally likely to place further pressure on listed companies in the coming years.

The role of pensioners in AI accountability

As the AGM season closes, PA Future highlights the rising concern among pension savers about AI risks. These savers’ funds clearly have a stake in the outcomes, both as shareholders and as workers likely to be impacted by AI. Research by PensionBee – an online pension platform – indicates that approximately 10% of defined contribution savers’ funds in the UK are invested in the ‘Magnificent 7’ tech companies. This dual interest explains why PensionBee found that 72% of its customers “believe shareholders should leverage their voting rights to influence how tech companies utilise AI”. However, recent AGMs at a number of those companies saw shareholder resolutions on greater AI oversight receive only 10-18% of the vote. In each instance, there was a considerable gap between the voting of pension savers and the final outcomes at the AGM. FTI previously discussed the rise in AI shareholder proposals in a Harvard Corporate Governance Forum paper. With the voting results now available, the differing interests of shareholders are notable, implying that individual investors like pension savers may be more concerned about ethical and social implications of AI than the broader shareholder base. As the focus on AI grows from several quarters, we may be beginning to see a growing gap between the level of concern pensioners and asset managers ascribe to AI oversight at large companies.

Final EU greenwashing claims Directive taking shape 

As all readers will be aware, there has been a significant increase in the number of companies seeking to attract customers by appearing ‘greener’, with claims of sustainability or carbon neutrality on products growing significantly. However, Euractiv reported that an EU study revealed that 40% of such claims on ecology were “completely unsubstantiated”, while 53% were “vague, misleading or unfounded.” Following steps taken by the EU Commission in March 2023 and the EU Parliament in March 2024, to address these failings, this week the EU’s Environment Council adopted its position on the law. Largely viewed as further progress in tackling Greenwashing in the bloc, the Council’s position has nonetheless been criticised in some quarters for ‘watering down’ the Parliament’s approach, by weakening the need to rely on scientific evidence and removing potential sanctions on companies. However, with the UK’s greenwashing law coming into effect last month, across jurisdictions, pressure is growing both from regulators and from NGO’s taking legal action for companies’ claims, communications and advertising to be grounded in fact and indisputable figures.

ICYMI 

• A Bloomberg survey reveals that 62% of Chinese firms struggle with the quality and coverage of ESG data. According to ESG News, key challenges include managing multiple ESG vendor feeds and integrating ESG data with existing data. Despite these challenges, there is a growing synergy between investor demands and regulatory drivers, highlighting the increasing importance of ESG in China’s financial markets. 
• ShareAction calls for a stronger approach from asset managers towards fossil fuels, warning that current policies might hinder the transition to a lower-carbon economy. As reported by Environmental Finance, a review carried out by the group shows that most asset managers limit fossil fuel investments to coal and unconventional oil and gas in specific funds.